There are few truisms about the world economy, but for decades, one has been the role of the United States dollar as the world’s reserve currency. It’s a core principle of American economic policy. After all, who wouldn’t want their currency to be the one that foreign banks and governments want to hold in reserve?

But new research reveals that what was once a privilege is now a burden, undermining job growth, pumping up budget and trade deficits and inflating financial bubbles. To get the American economy on track, the government needs to drop its commitment to maintaining the dollar’s reserve-currency status.

The reasons are best articulated by Kenneth Austin, a Treasury Department economist, in the latest issue of The Journal of Post Keynesian Economics (needless to say, it’s his opinion, not necessarily the department’s). On the assumption that you don’t have the journal on your coffee table, allow me to summarize.

It is widely recognized that various countries, including China, Singapore and South Korea, suppress the value of their currency relative to the dollar to boost their exports to the United States and reduce its exports to them. They buy lots of dollars, which increases the dollar’s value relative to their own currencies, thus making their exports to us cheaper and our exports to them more expensive.

In 2013, America’s trade deficit was about $475 billion. Its deficit with China alone was $318 billion.

Though Mr. Austin doesn’t say it explicitly, his work shows that, far from being a victim of managed trade, the United States is a willing participant through its efforts to keep the dollar as the world’s most prominent reserve currency.

When a country wants to boost its exports by making them cheaper using the aforementioned process, its central bank accumulates currency from countries that issue reserves. To support this process, these countries suppress their consumption and boost their national savings. Since global accounts must balance, when “currency accumulators” save more and consume less than they produce, other countries — “currency issuers,” like the United States — must save less and consume more than they produce (i.e., run trade deficits).

This means that Americans alone do not determine their rates of savings and consumption. Think of an open, global economy as having one huge, aggregated amount of income that must all be consumed, saved or invested. That means individual countries must adjust to one another. If trade-surplus countries suppress their own consumption and use their excess savings to accumulate dollars, trade-deficit countries must absorb those excess savings to finance their excess consumption or investment.

Note that as long as the dollar is the reserve currency, America’s trade deficit can worsen even when we’re not directly in on the trade. Suppose South Korea runs a surplus with Brazil. By storing its surplus export revenues in Treasury bonds, South Korea nudges up the relative value of the dollar against our competitors’ currencies, and our trade deficit increases, even though the original transaction had nothing to do with the United States.

This isn’t just a matter of one academic writing one article. Mr. Austin’s analysis builds off work by the economist Michael Pettis and, notably, by the former Federal Reserve chairman Ben S. Bernanke.

A result of this dance, as seen throughout the tepid recovery from the Great Recession, is insufficient domestic demand in America’s own labor market. Mr. Austin argues convincingly that the correct metric for estimating the cost in jobs is the dollar value of reserve sales to foreign buyers. By his estimation, that amounted to six million jobs in 2008, and these would tend to be the sort of high-wage manufacturing jobs that are most vulnerable to changes in exports.

Dethroning “king dollar” would be easier than people think. America could, for example, enforce rules to prevent other countries from accumulating too much of our currency. In fact, others do just that precisely to avoid exporting jobs. The most recent example is Japan’s intervention to hold down the value of the yen when central banks in Asia and Latin America started buying Japanese debt.

Of course, if fewer people demanded dollars, interest rates – i.e., what America would pay people to hold its debt – might rise, especially if stronger domestic manufacturers demanded more investment. But there’s no clear empirical, negative relationship between interest rates and trade deficits, and in the long run, as Mr. Pettis observes, “Countries with balanced trade or trade surpluses tend to enjoy lower interest rates on average than countries with large current account deficits, which are handicapped by slower growth and higher debt.”

Others worry that higher import prices would increase inflation. But consider the results when we “pay” to keep price growth so low through artificially cheap exports and large trade deficits: weakened manufacturing, wage stagnation (even with low inflation) and deficits and bubbles to offset the imbalanced trade.

But while more balanced trade might raise prices, there’s no reason it should persistently increase the inflation rate. We might settle into a norm of 2 to 3 percent inflation, versus the current 1 to 2 percent. But that’s a price worth paying for more and higher-quality jobs, more stable recoveries and a revitalized manufacturing sector. The privilege of having the world’s reserve currency is one America can no longer afford.

2 thoughts on “John Kerry Warns “Dollar Will Cease To Be Reserve Currency Of The World” If Iran Deal Rejected”

I will report this story once again, I was paying attention at the time, and caught the truth about the entire idea of a world reserve currency. Technology has taken its toll…..

It was Spring of 2010. Hugo Chavez was the leader of a small group of South American nations (including Cuba) called the South American Trade Alliance. He introduced the first electronic currency to the world…..The Sucre. The Sucre allowed member nations to trade directly with each other USING THEIR OWN CURRENCIES….for the first time in modern history, they didn’t have to convert to the US dollar first to make an international trade. The Sucre translated the value of each currency at the time of transaction, making the need for any world reserve currency obsolete.

It was such a small organization, the nations so poor, that it flew under US radar. I caught it because I am an economics geek, but so did Russia and China. They watched the progress of the Sucre for six months, and seeing its smooth operation, decided to establish an identical trade system between each other in November of 2010. They would trade with each other using their own currencies, leaving the dollar out.

China went on to recruit Turkey, India, Iran, Australia, most emerging African nations, Brazil and many other South and Central American nations, and Canada. The world was fed up with the US after Wall Street crooks caused entire nations to go bankrupt, and not one thing was done to fix the problems or punish any of the wrongdoers. The US lost its most valuable asset, its credibility.
The world saw the corruption was too complete, and started to move away from the US.

Hugo Chavez provided the answer. Technology not only eliminated the need for the dollar in international trade, but it rendered many nations free from US economic domination. Today, many nations no longer use the dollar, electronic currencies have made trade far more efficient. That is the real truth, and Kerry is full of crap.

Before the advent of the Sucre, the US had a hammer lock on every economy on the globe……now, it is just another currency. Regardless of the lies told on the financial channels, the dollar has lost much relevance, and our country has lost world respect. Technology has rendered the need for any world reserve currency obsolete, and nothing anyone can say or do will change that fact.

The US is no longer the world reserve currency because of technology. The last hold outs are the Saudis, Japan and the Euro……….The Saudis will abandon the US once it no longer needs it, Japan is dying as is the Euro. The US is on the wrong side of history once again……..the losing side.

I think we ought to trade with Iran, but it has nothing to do with the dollar. It has to do with the fact endless sanctions for something they did back in 1979……I was a senior in college; and I remember the event very clearly, and the cause was never once referred to on US media.

The Iranians overthrew the shah, a dreadful man the US had installed back in 1952. He used to have dinner parties and would torture prisoners for entertainment……a sicko. They overthrew him, and he jumped on his private jet and flew directly to the US. The people were terrified the US would reinstate him, so they took over the US embassy, and held the people there prisoners for 444 days. Every night, it was played on US news; “America held hostage”.

The rebels released the women, and allowed them to return home, but kept the men. Because of this, Iran has been on the enemy list ever since. It was never explored why the people took the American embassy hostage; it was years later before I realized the true reasons behind their behavior.

I do not pass judgment, both sides made serious mistakes, but to hold them as enemies over 35 years later is mindless.

I agree with Kerry it is time to open the gates. I don’t agree with his lies about the world reserve currency, we are losing that thanks to our loss of respect and the evolution of technology.